This recession has brought down a lot of things: banks, home values, 401(k)s, and the price of a belly-filling meal. To court cost-conscious consumers casual-dining chains have turned to promoting value-priced menu items in the $4 to $7 range. But is their strategy working, and what does it mean for limited service?
It’s no secret that casual dining has been hit hard by this economic downturn. Last year saw the bankruptcy of established brands like Bennigans Grill & Tavern and negative comps across the segment. Not even big-name players have been immune.
“The major chains are really struggling,” says Bonnie Riggs, a restaurant industry analyst with market research provider NPD Group. “They are facing some real challenges.”
High on that list of challenges is the flight of their customers to quick-service and fast-casuals. Lured by lower-priced eats and hooked by offerings that have gone increasingly upscale, consumers who used to frequent full service have traded down, and they seem to be staying there.
“I think they’re finding satisfaction with what they’re getting,” says Bob Sandelman, CEO of market research and consulting firm Sandelman & Associates. “Some of these customers maybe haven’t been to [quick-service or fast-casuals] in a while, but now they’re realizing that the food is pretty good, the service is exceeding their expectations, and they like what they see.”
To bring consumers back, casual-dining chains are rolling out the deals. While not new to the segment, the abundance of discounting and lower-priced offerings increased since the fall of 2008, Riggs says. In November of that year Applebee’s launched its “2 for $20” deal, in which diners get two entrées and an appetizer, as a limited-time offer. This spring it came back for an encore. Chili’s lowered the bar a bit more in April with a menu of 10 items priced less than $7, and T.G.I. Friday’s went lower still, with salads and sandwiches for $5 during the month of May. All were promoted heavily with national television advertising.
“They’re fighting fire with fire,” Sandelman says.
Experts say lower-priced offerings in casual dining have a dual purpose: to bring in more guests and drive sales—with the former a prerequisite to accomplishing the latter. Traffic in casual dining fell by 2 percent from the previous year for the final quarter of 2008 and customer counts fell off even faster in the first quarter of 2009, according to NPD.
“People coming in the door is of the utmost importance right now,” says Keith Gellman, president and publisher of the Web site RestaurantChains.net.
While the Applebee’s “2 for $20” deal is more likely to attract dinner traffic, ones like those offered by Chili’s and Friday’s seem to be taking dead aim at quick-serves’ bread and butter daypart. The Friday’s $5 offer ended at 5 p.m. daily.
“They’re trying to ramp up business at lunch,” says Darren Tristano, executive vice president at Technomic, a food industry tracking and consulting firm.
The heavily promoted lower prices are intended to make the chains top of mind for lunchgoers and avoid a veto vote from penny-pinching members of a group, Tristano says.
“They are meant to drive value-seeking consumers who are going to look for price point above everything else,” he adds.
But how can casual-dining restaurants, with the overhead from their large footprints and waitstaff, offer prices on par with quick-service and fast-casuals? One way is to offer smaller portions, which Chili’s does on its “10 under $7” menu and Cheesecake Factory does with its “Small Plates and Snacks.” Gellman posits that some chains might also be partnering with manufacturers to help them promote certain items at a lesser cost. Some, too, are taking a scalpel to food and labor costs. In any case, the low price can act as bait to fill seats with customers who might choose to add on high-margin items like appetizers, drinks, and desserts.
“I’m sure the waitstaff has been properly trained to upsell,” says food-cost consultant Joe Dunbar. “It’s not everyone that sits down has a $5 sandwich with a glass of water.”